Widely read:
Equity-linked saving schemes (ELSS) have swiftly become a popular tax-saving destination. They have multiple factors working in their favour: good returns, transparent reporting, greater accountability, tax exemption up to Rs 1.5 lakh under Section 80C and shorter lock-in period of three years. Since ELSS funds are generally multi-cap, they allow investors to own a multi-cap portfolio of stocks across sectors.
However, thanks to the bad habit of delaying making tax-saving investments till the last moment, tax-saving funds have historically witnessed lump-sum investments in the last quarter of the financial year. While making one-time investments in traditional instruments like Public Provident Fund doesn't hurt returns, with ELSS, doing so can cause investors to catch a market high and thus increase risk, not to mention the sub-optimal fund choice one might make in a hurry.
However, this trend could be changing now. Our analysis of AMFI data shows that investors are increasingly adopting the SIP route for their ELSS investments. The accompanying graph captures the proportion of the annual net flows into ELSS across the four quarters for the last five financial years. The data shows the flows getting gradually evened out, with a smaller bump-up in the last quarter.
While the last quarter of FY15 saw ELSS bag 80 per cent of the total net flows for the full year, the fourth quarter of FY19 saw them collect only 39 per cent of the full-year flows. The quarterly net flows of FY19 have been almost evenly spread. This highlights a much-awaited shift in the habits of ELSS investors from lump sums to SIP investing. This is welcome. Rather than scrambling to plan their taxes at the last minute, investors now seem to be understanding the importance of planning in advance. The SIP route also helps disciplined investments with the benefit of rupee cost averaging.
So, if you haven't already started your tax-saving SIP, there's still time as we are just in the second quarter of the current financial year. Go ahead and join the new trend!
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